China is a huge opportunity – ambitious suppliers will respond

The growth in Chinese consumption demand has opened the doors to the domestic market. But supply chains must be smart, says CIPS chief economist John Glen

The meteoric rise of the Chinese economy over the last thirty years has been based on a number of key growth strategies. Firstly, a lack of domestic purchasing power forced China to develop export-led growth strategies. Deploying access to large quantities of cheap labour and focusing on technologically unsophisticated industries enabled China to export in large quantities. So successful was this strategy that the Chinese economy started to run significant trade surpluses.

These surpluses came under criticism from trading partners. It was suggested that the Chinese had deliberately suppressed the value of their currency to allow their goods to remain globally competitive. China was accused of protecting its domestic industries and not allowing foreign goods and capital to access their domestic economy.

The Chinese economy needed to rebalance, to be less dependent on exports.

The country then engaged in a process of large-scale domestic investment. The currency was allowed to appreciate, encouraging imports and helping to reduce trade surplus as a proportion of GDP. Finally, domestic markets were opened up to imports, making it easier for foreign companies to operate in China.

This rebalancing strategy worked: China’s trade surpluses as a proportion of GDP fell and investment as a proportion of GDP rose.

However, recently the investment share of GDP has started to fall. Hence the final part in the rebalancing jigsaw saw the authorities encouraging domestic consumption to expand. Since 2012, rebalancing from investment to consumption has made headway — consumption now contributes two-thirds of GDP growth.

For Chinese supply chains, there is a clear move up the value chain by onshoring more sophisticated production, and this has been happening for a number of years.

In addition, China appears to be at an inflection point with respect to lower-value-added labour-intensive products. After a three-and-a-half-decade rise, market shares have started to plateau and even decline in some key sectors like garments, footwear, toys, and furniture. Labour-intensive goods had already been falling as a share of total exports for some time, on account of China’s boom in capital- and research-intensive sectors. But global market shares in these goods had remained resilient until recently. Many argue that this was a function of an increase in production inland, where wages are lower, but data suggest that exports are still produced almost exclusively on the coast.

Another trend to affect supply chains is the mixed evidence on rebalancing. Imports of certain commodities like coal and copper are declining, but others, like oil, food, and agricultural commodities remain strong. Consumption is on an upswing, but imports of these remain modest except for tourism.

The upswing in consumption demand appears to be following a well-established pattern. Initially, Chinese consumers tend to prefer local brands, but as incomes increase so will the preference for global brands.

Supply chains will then have to respond to the key challenges that they are facing in retail markets globally in a Chinese context. Chinese consumers will expect specialised products with high levels of availability, service and customer experience at a competitive price. Producers will be expected to respond swiftly to changing consumer preferences and ensure 100% availability via a proliferation of channels. The key supply chain challenges of sourcing, replenishment and distribution will need to rely on data analytics capability married with end-to-end real-time supply chain visibility to meet the consumers’ preference for ‘on demand’ fulfilment rather than ‘on the shelf’ fulfilment.

The rise of the Chinese consumer will create enormous opportunities. The winners will be those suppliers who can build agile supply chains that can respond to changing consumer preferences and deliver via many channels to consumers in tier one, two and three cities.